Loading...


2019 September
Home >  CGCC Vision > 
Virtual Banks: Conventional Banks’ Rival or Solution?

A virtual bank, as the name suggests, is a bank with neither physical presence nor branches, which is also its biggest difference from a conventional bank. Is this new intermediary-free banking model a rival or solution for conventional banks?

 

Chan Ka-keung: Virtual Banking Offers a Whole New Experience

Chan Ka-keung, Senior Advisor of WeLab Holdings and Chairman of WeLab Virtual Bank, believes that virtual banking is set to be well received by young people as it is in line with their lifestyle: “The new generation prefers to communicate via mobile phones than to hold face-to-face conversations. They will inevitably use their mobile phones to call taxis, book air tickets, pay fees, etc., which shows that mobile phones are the closest thing to the daily lives of modern people.”

 

“The concept of virtual banking is to provide a financial platform where transactions such as payment, borrowing, credit card services, insurance purchase and asset management can all be completed via mobile phone.” Chan added that the Mainland e-payment market is currently monopolised by Alipay and WeChat Pay. Although neither of them is a bank, they are actually running a wealth management-related business, which fully reflects finance’s flexibility and adaptability, and the wealth of possibilities it presents.”

 

Significantly reduces costs and overcomes geographical constraints

Compared with conventional banks, virtual banks can greatly reduce rental and manpower costs since they do not have any brick-and-mortar branches, and by using technologies such as AI, they can further cut down on manual processes. “In the past, many conventional banks handled borrowings at high manpower costs. However, there is now a loan facilitation technology in the Mainland that analyses different online, social media, mobile phone and daily behavioural data to understand a borrower’s behavioural patterns and psychological characteristics so that lending institutions can assess credit risks and complete the approval process in a matter of minutes.”

 

According to Chan, conventional banks are currently using technologies and computer systems that were built many years ago and cannot be changed massively. In contrast, emerging virtual banks use the latest technologies and can store data in the cloud, which not only incurs much lower costs than conventional banks, but also facilitate future modifications and improvements.

 

In addition, Chan believes that technological breakthroughs can overcome geographical constraints. “If virtual banking is widely adopted around the world, theoretically a Hong Kong customer does not necessarily need to have a local account in Hong Kong. As long as he has a virtual bank account abroad, he can enjoy the same financial services without opening an account locally.”

 

HKMA’s forward-looking policy

This year, the Hong Kong Monetary Authority (HKMA) has issued eight virtual banking licenses, which Chan said was quite aggressive. For example, South Korea and Taiwan issued only two or three licenses, and Singapore will issue licenses in the future, but their eligibility criteria are quite restrictive. According to his analysis, since Hong Kong has always been a free-market advocate and believes in free competition, licensed institutions will naturally be subject to the market mechanism, and only the fittest will survive.

 

Chan explained that the HKMA has always encouraged the development of financial technology (fintech) and closely keeps an eye on its new trends. “The HKMA may have particularly taken note that fintech is developing rapidly in the Mainland. An insurance company in the Mainland is a case in point. If a customer needs to claim insurance compensation for a car crash, he only needs to photograph the damaged parts and send the photos to the insurance company. Through AI analysis, the insurance company can immediately assess if and how much compensation should be paid. Given such a trend, Hong Kong must prepare well to avoid falling behind.”

 

Nevertheless, in Chan’s view, in the near future virtual banking may not necessarily have a big impact on conventional banks, which after all always have many long-term, loyal customers. By contrast, it can be easy to open an account in virtual banks, but customers can also close it at any time, so how to retain customers is a major challenge for every virtual bank.

 

 

Carrie Leung: Win-win Collaboration between Conventional and Virtual Banks

Virtual banks are set to start providing services later this year. Although conventional banks will inevitably face some competitive pressures over the short term, they could achieve synergy with virtual banks in the long run by improving technologies and talents.

 

Carrie Leung, CEO of The Hong Kong Institute of Bankers (HKIB), said that increasingly more people are accustomed to using the online banking services of conventional banks amid the rapid development of fintech, which is a key reason for the emergence of virtual banks. “The advent of virtual banking is not only an unavoidable result of the rise of fintech, but also an important step for Hong Kong to move towards a new era of smart banking.”

 

Virtual and conventional banks each have their own strengths

Leung said that although conventional banks also have IT departments, there is still a certain gap in terms of technology applications compared with virtual banks, which have the support of fintech firms and talents. In addition, virtual banks are able to reduce rental and other costs as they use online platforms instead of brick-and-mortar branches. “Besides investing more resources to develop new businesses, virtual banks can step up big-data collection and analysis, tailoring more personalized products and services to improve customer experience as well as achieve inclusive finance. This is particularly appealing to young people, SMEs and start-ups that focus on efficiency, convenience and costs.”

 

However, Leung stressed that conventional banks also have many advantages, such as deep-rooted foundation, strong capital strength and good reputation. More importantly, they have established long-term relationships with a large number of customers. By contrast, virtual banks start their business from scratch. Besides offering innovative and convenient services, their financial soundness and cybersecurity are of paramount concern, which are the key for virtual banks to winning the trust of customers in the future.

 

Service quality is key to success

Leung noted that as online banking services become popular and virtual banks come onto the market, increasingly more conventional banking customers, including large businesses and high-end customers, will no longer distinguish between conventional banks and virtual banks when seeking banking services. Instead, they will consider which bank’s services are faster, better and more suitable for their needs. Therefore, conventional banks and virtual banks can actually complement each other.

 

In Leung’s view, the biggest beneficiaries of the rise of virtual banking are banking customers, especially SMEs. Since virtual banks have lower operating costs and greater flexibility in business planning, they can roll out more services and products for SMEs and adjust their fees according to the costs involved.

 

“The Hong Kong Monetary Authority (HKMA) has teamed up with the HKIB, the banking industry and relevant professional bodies to launch the Enhanced Competency Framework (ECF) for Banking Practitioners as a set of industry-wide competency standards.” Leung said that the framework covers six areas of expertise, such as anti-money laundering and counter-financing of terrorism, cybersecurity, retail wealth management, and credit risk management, from which both conventional and virtual banks can identify areas of application and for training of needed talents.

 

Competition is an opportunity for progress

“Conventional banks need to take care of many existing businesses, making it difficult for them to invest a lot of resources in the short term to improve digital technology and talents.” Nevertheless, Leung said that conventional banks can use this as an opportunity to gradually drive digitalization and computerization, thereby reducing costs and increasing their competitiveness in fintech and fees.”

 

Leung added that virtual banks can also strengthen their capabilities in banking specialties such as wealth management and risk management through training and bringing in more talents who are familiar with the development of diversified banking services, which will help them close the gap with conventional banks in the long run.

 

Competition leads to progress and opportunities. Introducing competition into an industry will help the industry improve together as a whole. Leung stressed that fintech is not monopolized by virtual banks and conventional banks can also develop concurrently. Through healthy competition with each other, they can even develop brand-new services and products, which are beneficial to both the industry and customers.

 

 

Steven Wei: Traditional Banks Are Walking but Virtual Banks Are Flying

Amidst the irresistible trend of fintech, the banking industry is gearing up to stand up to the challenge. According to Steven Wei, Deputy Director of AMTD FinTech Center of the Faculty of Business of the Polytechnic University of Hong Kong, the government’s active efforts to promote virtual banking could, indeed, effectively propel fintech development in Hong Kong. The move would attract companies, professionals, and technologies from around the globe to Hong Kong, such that advanced, world-leading technologies and operations of virtual banking can be rooted locally. Hong Kong could then establish a competitive advantage for long term development.

 

Virtual banking takes time to popularize

While electronic payment has been adopted in Hong Kong for quite some time, its popularity is yet to catch up with the same in the Mainland. Wei believed that the development of virtual banks in Hong Kong, similarly, has to follow a certain path.

 

As Wei saw it, virtual banks may not be able to constitute any substantial challenge to traditional banks in the near future. However, he added that with no brick-and-mortar operations, virtual banks can lower their operation costs; they also have an edge in service channels, risk control and the cost of service delivery. As such, virtual banks are able to capture certain clients from traditional banks, and even attract additional clients from around the world.

 

Competitive edge in small loans

Wei foresaw that by employing advanced technology in big data risk control, virtual banks do have a stronger edge over traditional banks in the scope of small loans business targeting at individuals and SMEs. Their strengths are partly competitive and partly complementing for traditional banks in loan business. As such, virtual banks do pose a rather strong threat to the loan business of small to medium banks. Traditional banks must, therefore, invest more resources into fintech expansion to respond to the challenges arising from the increased popularity of virtual banks.

 

Customer experience, efficiency and security are the three pillars for banking operations. Wei believed that customer experience is the critical success factor for virtual banks. In the long run, virtual banks must ride on big data,= artificial intelligence and other technologies to bring experience that “exceeds the customer’s expectations”.

 

Promoting industrial restructuring and upgrading

Wei quoted the famous line of Jack Ma: “If banks do not change, we must change the banks” to explain that an initiative to change does not have to come from inside. Wei pointed out that the virtual bank license issued by HKMA would create a “catfish effect” in the industry (by introducing a strong competitor, weaker players are inspired to become stronger. In other words, the intervention of an individual could often spark competition in a community). To stand up to the challenges of virtual banks, traditional banks must initiate changes to escape from the fate of elimination.

 

Internet advancements have enabled users to obtain banking service through various channels. In response to the unique features of virtual banks, Wei thought that traditional banks shall equip themselves with a more distinctive positioning and enhance their professional services. While SMEs and personal clients may prefer using virtual banks, it does not mean they would completely give up traditional banks.

 

Stay vigilant about unexpected risks

Wei remarked that virtual banks may not necessarily have a distinct edge with sizeable companies and high-end clients in the short run, because they lack the personal services that target high-end clients and the security and credit assurance for large transactions. He added that credit with traditional banks has originated from the trust on clients and even on the society. Credit takes time to build, which would be something difficult to gain by virtual banks in the short term.

 

Commenting on the role of the banking industry in the age of fintech, Wei said that “traditional banks are walking, but virtual banks are flying”. The innovation driver forms the wings that help virtual banks soar. That said, he also highlighted the “unexpected” risks associated with innovation, which could occur in emerging virtual banks. Although the industry itself or clients are enjoying the benefits brought about by technology, risk assessments shall be in place to prevent actual clash with “unexpected” risks.